Introduction to the Measurement of Interest Rates参考.pptVIP

Introduction to the Measurement of Interest Rate Riskby Frank J. Fabozzi Chapter 7 Introduction to the Measurement of Interest Rates Major learning outcomes: Quantifying the amount of risk affected by changing interest rates The two approaches to measuring interest rate risk: Full valuation Duration/convexity Key Learning Outcomes Distinguish between the full valuation and the duration/convexity approaches for measuring interest rate risk. Compute the interest rate risk exposure of a bond position for a given scenario. Explain the advantage of using the full valuation approach compared to the duration/convexity approach. State the price volatility characteristics for option-free bonds when interest rates change (including the concept of ‘‘positive convexity’’). State the price volatility characteristics of callable bonds and prepayable securities (including the concept of ‘‘negative convexity’’). Diagram the relationship between price and yield for an option-free bond and show why duration is effective in estimating price changes for small changes in yield but is not as effective for a large change in yield. Key Learning Outcomes Diagram the relationship between price and yield for a callable and prepayable security and show what is meant by negative convexity. Compute the effective duration of a bond given information about how the price will increase and decrease for a given shock in interest rates. Compute the approximate percentage price change for a bond given its effective duration and a specified change in yield. Diagram the relationship between price and yield for a putable bond. Explain how the interest rate shocks used to compute duration may affect the duration calculation. Differentiate between modified duration and effective (or option-adjusted) duration. Explain why effective duration should be used for bonds with embedded options. Key Learning Outcomes Explain the relationship between modified duration and Macaulay duration and the li